Faculty of Economics and Business Administration Publications Database

The Influence of Tariff-Specific Preferences on Tariff Choice and Usage

Wolk, Agnieszka
Volume: 3
Number: 1
Pages: 70 - 80
Month: May
ISSN-Print: 2198-3402
Link External Source: Online Version
Year: 2010
Keywords: Flat rate; Flat-rate bias; Nonlinear pricing; Pay-per-use bias; Price elasticity; Pricing; Tariff choice; Tariff-specific preferences; Three-part tariffs
Abstract: For many services, consumers can choose among a range of optional tariffs that differ in their access and usage prices. Recent studies indicate that tariff-specific preferences may lead consumers to choose a tariff that does not minimize their expected billing rate. This study analyzes how tariff-specific preferences influence the responsiveness of consumers’ usage and tariff choice to changes in price. We show that consumer heterogeneity in tariff-specific preferences leads to heterogeneity in their sensitivity to price changes. Specifically, consumers with tariff-specific preferences are less sensitive to price increases of their preferred tariff than other consumers. Our results provide an additional reason why firms should offer multiple tariffs rather than a uniform nonlinear pricing plan to extract maximum consumer surplus.